Take the Guesswork Out of Inventory
Most veterinary staff order products based on fear:
I’m afraid of ordering too much.
I’m afraid of running out.
I’m afraid to spend that much money.
What if I miscalculate?
“It looks like we’re running low” really means “There are fewer bottles on the shelf than usual. I don’t want to run out!”
Likewise, “Those products are expensive; better just get a few,” really means, “Yikes! If I overorder, I’ll lose my merit increase next year.”
The bottom line is that most veterinary staff don’t trust themselves to make smart ordering decisions. As long as that feeling persists, they cannot move to the next level of inventory management.
Here’s why: For veterinary practices that have already mastered basic inventory management (e.g., process controls, consolidated ordering), the next challenge is to increase inventory turns.
Because increasing inventory turns increases your practice’s profitability.
Stock that sits on a shelf is like cash stashed in a mattress. Wouldn’t you rather earn some return on that cash? The less cash you have tied up in stagnant stock, the more you have to invest elsewhere, in ways that will yield greater returns than inventory can. (For a simple example, see “Making More by Stocking Less.”)
With typical inventory controls, product turns over four to five times per year. That means each product sits on the shelf an average of two to three months.
The next level of sophistication in inventory management is reducing the amount of time products sit on the shelf. And that means changing the reorder points.
People must abandon their comfortable and familiar reorder points—to order two bottles of shampoo instead of six, and to postpone the reorder until it is truly necessary.
Scary stuff for people who are afraid of making mistakes.
That’s why the real challenge in inventory management is to help people gain confidence in their ability to make good decisions about
reordering. Once they have that confidence, you can change reorder
points repeatedly until you achieve your ideal turnover.
How do you increase that confidence?
Take the guesswork out of it. Create a reorder protocol that gives staff formulas they can use to calculate exactly when to reorder.
A Tried-and-True Formula
Through years of observation, shelf counting, and analysis, inventory management experts have created a flexible, simple formula any practice can use to calculate reorder points:
annual sales/desired turnover = reorder point
Here’s how it works:
In the average practice, inventory turns over four to five times per year. Assuming a practice sells 60 units per year and adopts the most conservative approach to turnover, the formula is:
60/4 = 15
When there are 15 items left on the shelf, it’s time to reorder.
That means the product can be expected to sit on the shelf for three months. (At 60 units per year, monthly sales are 5 units. If you reorder when there 15 units in stock, you can expect those 15 units to last three months before you need the newly ordered product.)
Changing the Denominator
Is that a good decision? Not really.
This approach ties up cash that could be used for other purposes and puts too much product on your shelves.
A much more effective formula for calculating the reorder point is:
If your annual sales are 60 units, the reorder point is 5.
This formula requires the inventory manager to reorder when there is a full month’s supply on the shelf. (Annual sales divided by 12 yields monthly sales.) This approach is conservative enough to ensure that you will rarely run out of product while freeing up cash for other purposes.
An aggressive reorder point is:
In this case, for a product with annual sales of 60 units, you would reorder when there are 3 units left on the shelf.
You run a slight risk of running out of that product, but depending on the value of product, running out may not result in enough lost revenue to cause concern. And remember, when you order with three units left on the shelf, you probably have at least two weeks for your delivery before you run out.
The most aggressive reorder point is one, or even zero.
If the reorder point is zero, this means that the hospital doesn’t carry the item but is willing to place a special order for it. This is an appropriate approach for rarely used products offered by practices in locations serviced by distributors with one- to two-day delivery.
Customizing to Your Needs
Are you most concerned about never running out of the most popular products? For those products, tweak the formula to the conservative side.
Do you need to avoid tying up cash in products that sit on the
shelf? Tweak the formula to the aggressive side for those products.
Creating a reorder protocol based on formulas tweaked for various
products takes the guesswork out of reordering.
But formulas only work when they are based on reliable data and when they are used. To ensure that the data are reliable, it’s important to do shelf counts and to tweak the formulas accordingly—for example, to use a more conservative formula during seasons of peak use. For a spreadsheet that tweaks formulas and performs calculations for you, use the Inventory TweakerTool.
To ensure that formulas are used, create a protocol and require staff to follow it.
Staff may resist; after all, trusting their overly conservative gut has kept them safe from the dreaded empty space on the shelf. Encourage staff to trust the formulas, regardless of their anxiety. Time will prove that their trust is well placed.
Reassure staff that if the formulas don’t work—if products fly off the shelves too quickly or linger too long—that it’s not the employee’s fault: It’s the fault of the formula or the data, or it’s a glitch (such as unforeseen peaks in use).
Praise the employee for using the formula—whatever the outcome—and then focus on tweaking the formula for better results. As the new system proves itself over time, staff will place their confidence in formulas rather than their fears.
Kathy Fritz is a practice consultant for AAHA MARKETLink, a veterinary product distributor. Her career includes more than five years in the management of private veterinary practices. She specializes in training veterinarians and their staff to better manage inventory. She has a Bachelor of Science degree in agricultural economics from University of Illinois.
Photos: © Alliance/Veer | © Syda Productions/Veer | © Brian Jackson/Veer